Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

QLogic Corp. (NASDAQ:QLGC)

F1Q10 Earnings Call

July 21, 2009 5:00 pm ET

Executives

Simon Biddiscombe - CFO

H.K. Desai - CEO

Analysts

Amit Daryanani - RBC Capital Markets

Paul Manskew - K. Adams

Jason Nolan - Robert Baird

Pasheek R. - Wedbush Morgan

Glenn Hanus - Needham & Company

Doug Ireland - JMP Securities

Brent Braceland - Pacific Crest Securities

Aaron Rakers - Stiffel Nicholas

Rajesh Ghai -ThinkEquity

Min Park - Goldman Sachs

Harsh Kumar - Morgan Keegan

Operator

Good day and welcome to the first quarter fiscal year 2010 QLogic earnings announcement conference call. (Operator Instructions) At this time, I’d like to turn the conference over the Simon Biddiscombe, Chief Financial Officer

Please go ahead, sir.

Simon Biddiscombe

Thank you, Sara. Good afternoon and welcome to QLogic first quarter fiscal year 2010 earnings conference call. Joining me on our call today are H. K. Desai, our Chief Executive Officer. I will begin the call with a review of the first quarter financial results. H. K. will follow with a discussion of the current state of our business, a brief update on our NetXen acquisition, and progress on our strategic initiatives. Afterwards we will open the call for questions.

Certain of our comments today will include forward-looking statements regarding future events and/or projections of the financial performance of the company based on our current expectations. These comments are subject to significant risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements.

We refer you to the documents QLogic files with the SEC, specifically our most recent form 10K. These documents identify important risk factors that could cause our actual results to differ materially from expectations. We do not intend to update the forward-looking statements that we make today.

In our first quarter earnings press release issued early today, we reported both GAAP and non-GAAP results. The difference between the results in fiscal year 2010 is due to stock base compensation, acquisition related charges, gains on sales of previously impaired investment securities, and the related income tax effects. A reconciliation of GAAP net income to non-GAAP net income and a summary of the non-GAAP adjustments are included in our earnings press release. All of the references we will make on our call today relate to non-GAAP results unless otherwise stated.

Turning now to our financial results for the first fiscal quarter ending June 28, 2009.

Our revenue in the first quarter was $122.8 million, a decrease of 27% from the same quarter last year. This revenue was within our forecasted range of $120 to $130 million, provided during our fourth quarter earnings conference call.

Our first quarter revenue from host products, which are comprised primarily of Fibre Channel and iSCSI host bus adaptors, was $88.3 million and decreased 27% from $120.7 million recorded in the first quarter of last year.

Host products also include FCoE converged network adaptors, InfiniBand host channel adaptors, and 10 gigabyte intelligent Ethernet adaptors from our NetXen acquisition.

First quarter revenue from network products, which are comprised primarily of Fibre Channel and InfiniBand switches, was $25 million and decreased 16% from $29.9 million recorded in the first quarter of last year.

Our first quarter revenue from silicon products comprised primarily of Fibre Channel and iSCSI protocol chips was $7.4 million and decreased 52% from $15.6 million recorded in the first quarter of last year. Silicon products also include chips for imbedded application from NetXen.

Our revenue from royalty and service was $2.1 million.

Our first quarter gross margin of 65.5% declined from 68.7% recorded in the first quarter of last year, primarily due to lower volume to absorb manufacturing costs and unfavorable product mix.

Our gross margin was below our forecasted range of 66-67%, provided during our fourth quarter earnings conference call, primarily due to excess and obsolete inventory charges on a lower than expected level of royalties.

Next I’d like to cover our first quarter operating expenses. Total operating expenses were $52.2 million, down 8% from $56.5 million reported in the first quarter last year. The operating expenses in the first quarter included approximately two months of expenses from NetXen.

Engineering expenses in the first quarter of $29.1 million decreased 3% from a year ago and declined as a percentage of revenue from 17.8% to 23.7%.

Sales and marketing expenses in the first quarter of $17 million decreased 17% from a year ago and increased as a percentage of revenue from 12.2% to 13.9%.

G&A expenses in the first quarter of $6.1 million increased slightly from $6 million a year ago and were 5% of revenue in the current quarter.

Operating profit in the first quarter was $28.3 million and decreased as a percentage of revenue from 35.2% to 23%.

Interest and other income was $2.3 million in the first quarter.

Our income tax rate for the first quarter was 21.9%. This is below the annual forecasted tax rate, primarily due to a favorable resolution of certain state, federal, and foreign tax matters.

Our first quarter net income of $23.9 million or $0.20 per diluted share declined from $42 million or $0.31 in the prior year.

This represented a net profit margin of 19.5% in the first quarter.

Our first quarter net income per diluted share was at the high end of our forecasted range of $0.16 to $0.20 provided during our fourth quarter earnings conference call. This represents the 56th consecutive quarter of profitability for QLogic.

Turning now to our balance sheet. The company’s cash and investment securities were $354.8 million at the end of the first quarter. Our strong cash position combined with the fact that we have no debt provides financial stability and significant flexibility in these uncertain economic times.

During the first quarter, we generated $16.9 million of cash from operations. During the quarter, we purchased $20.4 million of the company’s common stock at an average price of $12.77 pursuant to our stock repurchase program. Since 2003, we have repurchased over $1.3 billion of the company’s common stock under programs authorized by our Board of Directors.

Receivables of $68.9 million at the end of the June quarter increased from $68.5 million at the end of the March quarter. DSO at the end of June quarter was 51 days compared to 48 days at the end of the March quarter.

Based on hub arrangements of OEM customers and our current customer and channel mix, we expect DSO in the future will range from 45 to 55 days.

During the quarter, we made significant progress with regard to inventory. Inventory at the end of the June quarter was $29.9 million and decreased sequentially from $40.3 million at the end of the March quarter. This decrease in inventory was consistent with our expectation, following the successful contract manufacture transition that we had competed during the March quarter.

Annualized inventory turns for the June quarter was 5.7 compared to 4.2 turns for the March quarter.

Turning now to our outlook for our second fiscal quarter. We expect total revenue for the September quarter to be approximately flat to up 3% from the June quarter. We expect gross margin to be approximately 65%.

We expect operating expenses to increase to approximately $54 million, primarily as a result of a full quarter of NetXen expenses.

Based on these estimates and a projected annual tax rate of approximately 28%, we expect to achieve non-GAAP earnings per diluted share of approximately $0.16 to $0.18 in the September quarter.

Actual results for future periods may differ materially due to a number of factors, including those outlined during the course of this conference call, in the company’s filings with the SEC, and in the disclaimer statement at the end of our earnings press release.

I will now turn the call over to H.K. H.K.?

H.K. Desai

Thanks, Simon. My remarks today will be focused on the current state of our business, a brief update on our NetXen acquisition, and the quarterly update on our strategic initiatives.

Our revenue in the first quarter was $122.8 million. On a sequential basis, revenue from host products and netware products was flat and revenue from silicon products was down 46%. This is consistent with the prospective that we shared during our fourth quarter earnings conference call.

Despite the fact that we continue to experience effects of the broad macroeconomic slowdown, we are encouraged by the signs of stability we are seeing. This includes a number of factors. First, we are seeing signs of stability in our business with our key OEM customers. Second, variety of spending in the second half of our calendar year 2009 and 2010 has stopped eroding and in certain cases has started to improve.

Finally, we believe the markets continue to be our key priority for CIOs, which will be helpful.

We are very pleased with NetXen, which we acquired the end of April.

We have been very impressed by the executions of the NetXen team and the meaningful contributions they are making.

As we walk to provide our customers the benefits of the network and technology and products in the long-term, we launch some existing NetXen products under the QLogic brand.

For example, last quarter, we introduced a 3100 Ethernet adaptors offering ten gig connect for bandwidth, such as [inaudible] and good computing.

Now I’ll provide an update on our strategic initiatives. During the quarter, we made significant progress with regard to the three strategic initiatives that we previously discussed. Specifically, Fibre Channel and InfiniBand. Our focus on investment of this initiative is as important as they were to ensure that we are optimally positioned for growth and continued market leadership when the economy recovers.

IBM became the first year one system [inaudible]. QLogic is a primary provider for IBM As part of the launch, QLogic also announced availability of its new 10 gig enhanced internet high speed. Specifically, IBM is offering connectivity on all IBM [inaudible].

With our availability of QLogic’s latest products, IBM is enabling customers to leverage in the economy, while preserving investments and strands of Fibre Channel.

To put this all in perspective, the announced availability of our mix investment, single chip adaptor and 10 gig CEE module [inaudible].

We will secure a significance in design wins and will continue to discuss this in the future quarters.

Another major milestone for FCoE, on June 3, the working group of the technical committee completed its work and unanimously approved our final standard for FCoE. As a result, the committee approved standard for further processing as an official standard.

We strongly believe that we offer our customers a distinct advantage in terms of compatibility. Competitively, largest install base of Fibre Channel adaptors or 6.4 million, 2, 4, and 8 gig QLogic Fibre Channel adaptor, or $1 million more than our nearest competitor according to [inaudible] and common stored API’s and common management tools.

This fully supports the value proportion of FCoE, which is built around preservance of the Fibre Channel software stack in our present model.

As a result, QLogic customers are taking advantage of our market-leading, second generation [inaudible] products, while not giving up any of the benefits of the most widely-used Fibre Channel software stack.

We believe our market leadership and the install base of Fibre Channel, 2, 4, and 8 gig adaptors, are key adoption [inaudible].

Turning now to Fibre Channel. According to the Q12009 report, QLogic continued its leadership in adaptors and further expanded its market share lead over its nearest competitor.

For the first calendar quarter of 2009, QLogic achieved over 56% revenue market share in Fibre Channel adaptors, a full 19 point lead over our nearest competitor.

This is the widest lead we have in our history. We are clearly making the demanding requirements of our OEM and channel customers and provided superior value. This is an ideal position to occupy as we enter the [inaudible] conversions.

In the expanding market, we are more than 72% revenue market share for all Fibre Channel [inaudible] 2009.

During the quarter, [inaudible] Fibre Channel adaptors more than doubled and for the first time contributed more than 10% of revenue from host products.

We believe this revenue growth was driven primarily by the introductions of new higher performance Intel platforms.

We continue to successfully translate industrial leading Fibre Channel products and our roadmap for converged network in a strong market share positions.

Our Infini continues to deliver positive results. During the quarter, we announced an OEM agreement with IBM for QDR Infini, which is targeted at the high performance company market.

IBM is offering over 12,000, 40 gig QDR solutions as part of its dynamic portfolio, a suite of products designed to bring automation, integrations, and efficiency for both the infrastructures. The 12,000 [inaudible] was selected based on the significant advantages or competitive products, more connectivity options, greater bandwidth, and less power consumption. In addition, our software simplifies Infini networking and provides automated installations, configurations, and monitoring of the network.

QLogic is clearly rising as an innovator in the greater high performance networking world, developing new products for all protocols.

In closing, we are seeing clear signs of stableness within our business and this is reflected in the revenue performance of our host and network products in the first fiscal quarter and in our revenue guidance for the September quarter.

Key trends from our OEM customers. When viewed as a whole, we are seeing stability there also. We are obviously encouraged by this fact and believe that when combined with our extremely careful operating expense management, we have the company well positioned to experience improving financial performance.

Thank you, operator. This concludes the prepared remarks, so we are open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Amit Daryanani - RBC Capital Markets

Amit Daryanani - RBC Capital Markets

Just a question on the gross margin line, could you help us understand, is this a mix shift again that’s impacting it or is it pricing that’s driving the gross margins down a little?

Simon Biddiscombe

It’s kind of two-fold and pricing actually isn’t a big part of it. First and foremost it’s continuing to operate in an environment of very low volumes and we expect volumes to be down again. Even though revenues are increasing, we’re going to see a further work down of inventories in the current period by a few million dollars. So we’re continuing to be burdened at the gross margin level by manufacturing overhead that isn’t being absorbed across the same level of volume as we’ve experienced in the past. That’s the first part.

The second part is undoubtedly a small product mix that is impacting us as well. We were surprised or concerned by the ASP erosion, the pricing erosion that you alluded to. In fact, what we saw was very consistent with what we would expect and have historically seen as well.

Amit Daryanani - RBC Capital Markets

The cash flow number, it seems to be the softest we’ve seen in awhile and the crude expenses line seems to be the big driver over there. Could you help us understand what happened there and should that reverse in the next few quarters?

Simon Biddiscombe

It will. Don’t forget, during the most recent period, we actually saw somewhere around $15 million dollars leave the organization through the acquisition of NetXen. So that’s the first major cash outflow that is different than in previous periods.

The second one is associated with the payment of the annual incentives. So during the June quarter, we also paid the annual incentive. So on the cash flow, you’ll see a fairly significant change in the accrued compensation line and that’s the second major driver to the negative cash.

The third one would be the buyback. It was actually approximately $20 million dollars worth of buyback in the most recent period. So you add those up and you end up with roughly $60 million dollars just on the $60 million dollars across those very specific lines that left the organization.

Operator

Next we’ll hear from Paul Manskew - K. Adams

Paul Manskew - K. Adams

Can you help frame for us your views relative to a) the impact of the Sun acquisition on your business, and b) the ultimate ramp of the HB products, hopefully by this calendar year’s exit.

H.K. Desai

We haven’t seen really any impact of the acquisitions, what our forecast was initially when the quarter begins delivered by the Sun. So we’re not seeing really what they have publicly announced so far. We don’t expect to see in the future quarter also. So we’re not seeing really much impact of the acquisitions.

On the second question. We start seeing at the performance, which is double for the HB than the last quarter, plus it’s about more than 10% of our revenue. I think that is really driven by the (?).

Paul Manskew - K. Adams

Do you think 8 course specifically is going to be incremental a high-end server demand catalyst or is it just more a mix consideration point.

H.K. Desai

It’s a mix consideration.

Paul Manskew - K. Adams

And then, going back to the gross margin question, obviously you provided some context relative to 8 gig uptake. Does any of the gross margin attributable to 8 gig optics pricing or are you just passing that along to your customers.

H.K. Desai

What we have seen is a like-for-like products for the HB. We haven’t seen less than 2% ASP decline.

Paul Manskew - K. Adams

But from a bill of materials perspective, obviously 8 gig optics are still rather expensive. Are you passing that along to your customers or are you eating some of that to stimulate demand.

H.K. Desai

We are passing that along.

Paul Manskew - K. Adams

Lastly, given the stock’s lows of the quarter, your buyback was a bit lighter than what we would have expected. Should we be reading into anything? Your appetite for future acquisitions?

Simon Biddiscombe

No, I think the message is the same on a full year basis. We continue to expect that the free cash flow of the business will be used in buyback pull and if you think about the most recent quarter, obviously we had a reasonable amount of cash leave the organization for the NetXen acquisition and we were therefore comfortable with where the buyback was. As H.K. and I have said in the past, something around $350 million dollar cash number feels very appropriate for the business. So as you look forward, you should expect that roughly the free cash flow on an annual basis will be the buyback.

Paul Manskew - K. Adams

Is there any way you guys can provide us some context relative to full year growth expectations for your different revenue groups?

H.K. Desai

No, we’re not offering a perspective beyond the current period, Paul.

Operator

Next we’ll go to Jason Nolan - Robert Baird

Jason Nolan - Robert Baird

Simon, a question for you on OpEx. It looks like we’re turning up a little bit into the next quarter. Could you talk a little bit about projectory through fiscal 2010.

Simon Biddiscombe

The principle reason for tick up, Jason, in the September quarter is obviously the fact we’ve got a full quarter’s worth of NetXen expenses. So last quarter, being the June quarter, we only had approximately two months. Actually did a very good job last month of squeezing all discretionary expenses you’ll have noted that the actual performance last quarter was significantly below the guidance we provided for OpEx. So we did a very good job on OpEx management last quarter. The tick up in the current period is because of a full quarter of NetXen and as you look forward, we continue to expect the full year number will be roughly $215 million dollars. That’s the perspective that we offered you last quarter. That hasn’t changed. If you think about it as roughly $54 million per quarter, over the course of three quarters left in the year, you get roughly the right answer.

Jason Nolan - Robert Baird

There’s more talk of hardware replacement cycle with some saying server and storage would be an area of focus and I guess kind of a follow-up to the previous question, how much visibility do you have into those trends, if any at all.

H.K. Desai

I think what we are seeing is that like I said, we are seeing the stability business, like our host and netware products flat in the June quarter, and we give our guidance which is we expect flat to approximate 3% sequential growth in both of these products. We expect silicon products to be flat and royalty or other revenue will be also flat. So what we’re saying is that we start seeing the stability in our business. We start seeing stability in the forecast and also the other patterns. I don’t know whether this is really because of what we’re seeing in the server markets and I think we expect to continue we’ll be in pretty good shape.

Operator

Next we’ll move onto P. R. - Wedbush Morgan

Pasheek. R. - Wedbush Morgan

So going back to the gross margin question, it seems like your InfiniBand products were suppose to have better margins as you used your own asics. So are you not seeing that yet or do you over the next couple quarters you would expect IB margins to be better?

Simon Biddiscombe

No, we didn’t imply that this was attributable to InfiniBand. We’re actually very pleased with the progress we’ve made in the InfiniBand business with regard to gross margins over the course of the last year in reality and we would expect it to continue to improve as we move forward as more products ships with our own asic solutions as opposed to those that we historically had to purchase from a third party, but I don’t want to give you the impression that the gross margin mix issue we’re talking about is primarily driven by InfiniBand or anything like that.

Pasheek R. - Wedbush Morgan

Then on the silicon and royalty and services, should we assume flattish for September quarter?

Simon Biddiscombe

Yes, that’s exactly what H.K. just said in response to the last question. I think both the silicon and the royalty and service line, an expectation of roughly flat is appropriate.

Pasheek R. - Wedbush Morgan

Last question on CNA’s. I have no doubt that you are leading in the CNA market, but it’s getting crowded. I mean it seems like Cisco has its own CAN. Tomorrow morning IBM will announce brocade CNA. So how do you see that market evolving? I’m hearing that Intel is also trying to do something. So how do you see that market evolving? The tam doesn’t seem like it’s increasing, but more players are there.

H.K. Desai

I don’t know if you remember or not, you were probably too young at the time, but when we started Fibre Channel, we were 25 suppliers and it came down to five and eventually become two. So eventually there will be about two to three suppliers. I think the biggest benefit we will have is because COE’s, Fibre Channel or internet standards, so our stack, install base at 6.4 million force, which is the highest in the industry for the 2, 4, and 8 gig. We have absolutely no question advantage over this. If we keep executing in the future, I think we’ll be one of the key players in this market.

Operator

Glenn Hanus - Needham & Company, please go ahead.

Glenn Hanus - Needham & Company

Fibre Channel over Ethernet and CNA’s, how do you think from a timing perspective, when are you now thinking about a ramp. I think your competitor is talking sort of maybe mid next year and over the last quarter, is that moved up or moved out? How would you characterize that?

H.K. Desai

So we start shipping those products, for example, to IBM and as a sample to a lot of the customers, we saw about less than a million dollar in revenue in the June quarter from that COE technology. So we expect some revenue coming in the second half of 2009 and ramp start coming in 2010. So there is no difference than what we said in the past.

Glenn Hanus - Needham & Company

Okay, and maybe you could provide some context on the 10 gigabyte Ethernet. You announced your card there. Sort of timing and sort of the magnitude or contribution that that area can make you guys in the next couple years.

H.K. Desai

I think it’s too early to predict anything. What we have done is really we are already shipping a NetXen product with OEMs and we announced the Channel product under QLogic’s brand. So we just announced this product. So I think it’s going to take some time. I really can’t predict the ramp, because this is a new market for us, but what we’re doing is because NetXen has the technology and we are going after the market.

Glenn Hanus - Needham & Company

When should we expect to see some revenue there and can you give us some color where that whole effort is?

H.K. Desai

We are seeing some revenue on the long side from the NetXen products and I think because we have some design, we will continue to do that. I think (?) probably won’t come until probably some time next year.

Operator

Next we’ll hear from Samuel Wilson - JMP Securities

Doug Irelend in for Samuel Wilson - JMP Securities

Thank you. This Doug Ireland for Sam. I was wondering if you saw any benefit from disruption of your competitors because of the uncertainty around their future in the last quarter.

H.K. Desai

I think it is no different than our performance. I mean we’re getting a market share on the Fibre Channel adaptor for the last few years and we will regain about three or four point share in the Q1. We had about 19 points. So there is nothing unusual than what we are seeing for the last few years in this market.

Doug Ireland in for Samuel Wilson - JMP Securities

So with your revenue in that area flat and your share gainings, does that mean that the business is getting smaller? I mean HPAs is a shrinking business now.

H.K. Desai

We don’t know what our share is going to be in this quarter, because our competitor hasn’t announced anything. So I think it’s too early to say what’s happening. I think market might have some impact on COE, but I don’t think it will happen until next year.

Doug Ireland in for Samuel Wilson - JMP Securities

Okay, I’m just trying to reconcile gaining share, not gaining revenue. I was just wondering on the royalty revenue, are you expected to see that growing as QLogic is a more important source of Fibre Channel’s stack to other switch vendors. Is there a different place that that is showing up in your revenue line or is that business not materializing the way I thought it might?

Simon Biddiscombe

So the royalty and service line is actually primarily service and not royalty as we’ve said in the past and that is where you would expect to see any royalty we would enjoy from the Fibre Channel switch business, but suffice to say we expect it to be flat as we look forward.

Doug Ireland in for Samuel Wilson - JMP Securities

Thank you.

Operator

Brent Braceland - Pacific Crest Securities

Brent Braceland - Pacific Crest Securities

Just actually had a follow-up question on gross margin. As you think about kind of mix, you did cite product mix impacting gross margin. As we think about layering in NetXen revenue and I know CNA were early days here, but as we think about layering in CNA revenue, how are those going to impact product gross margins? Do you think those are going to be at or below the kind of guidance of 65% gross margin going forward?

Simon Biddiscombe

The way we’ve looked at it, Brent, and this is Simon, is that if you look at all of our combined converged businesses, they’re going to have roughly the 65% long-term gross margin that we expect for the business. We’re not breaking out individual product families to the level of detail you’re looking for. What we’ve said is that we expect it to be approximately 65% when you combine all of those technologies. There’s no doubt that’s what swamping any product effect at this point in time. It’s just the volume effect. So if you look at where the revenues are today versus where they were a year ago and you think about the impact that has on gross margin because of the significantly diminished volumes. That’s by far and away overwhelming any positive benefit that we may be experiencing from product at this point in time.

Brent Braceland - Pacific Crest Securities

As a follow-up to that, do you expect a margin benefit by going to a new contract manufacturer and if so when would that start to kick in? Do we need to see inventory kind of bottom before we start to see a benefit there?

H.K. Desai

As we look forward over the course of the remainder of the fiscal year, once you get beyond the current period, we certainly expect to see margins improve as revenues improve. So the outlook is that for many different reasons, one of which is the change of contract manufacturer that we went through recently that deduced out to see margins improve as you move forward through the year.

Brent Braceland - Pacific Crest Securities

Last question here for H.K. Revenue clearly kind of bottoming on this quarter here, how should we think about drivers to the business?

H.K. Desai

I think it’s the same thing with what we said before is going to be Fibre Channel. 8 gig ramp is going to help us. New technology coming out is going to help us and I think the most important is economy is going to be the big factor. InfiniBand, I think we’re going to gain the share and we also have our growth in the Infini business in the June quarter and we expect to continue this in the second half of 2009. So have a lot of drivers. Plus on top of that, the intangibles is converged OEM and we start seeing some revenue now and start picking up by the second half of 2009 or the next year I think we’ll start seeing some. So there’s a lot going forward.

Operator

Next we’ll hear from Aaron Rakers - Stiffel Nicholas

Aaron Rakers - Stiffel Nicholas

H.K., I’d love to get your thoughts on following the Broadcom Emulex dynamic and what you see there looking forward in terms of it sounds like Broadcom is still very much committed to doing something. So I’d love to get your take on what you see from an industry perspective opposed to that kind of falling apart.

H.K. Desai

I think the key for us is what we’re saying for the last few years, Aaron, is that COE the converge network is a great opportunity going forward and I think that’s the market I think will be growing. I think that’s Broadcom Emulex, strategy which we’re working on for the last few years.

The second thing is that in the converged network adaptor or converged network market, I think the key technology you have to have is a Fibre Channel stack, which is an industry-leading standard. So I think that’s going to help us. Whoever has a Fibre Channel stack with storage expertise and time to market silicon, I think is going to help us.

Aaron Rakers - Stiffel Nicholas

I guess use of the cash as we go forward. Any updated thoughts on that front, share repurchase or other?

Simon Biddiscombe

What we said was that we continue to expect that when you look at our full year basis, the buyback will be roughly the free cash that is generated by the business and obviously H.K. and I have a tremendous discretion around that.

Operator

Next we’ll hear from Rajesh Ghai -ThinkEquity

Rajesh Ghai -ThinkEquity

Just one question on guidance and the forecast you might be getting from your OEM customers.

Simon Biddiscombe

We didn’t on specifically what we’re seeing over the course of the forecast that we receive from OEMs. Ragesh, what we said that clearly things were more stable as we looked at those forecasts and that obviously we gave contemplation to that within the context of the guidance, but we didn’t try to imply what we were seeing as it related to the outer appearance.

Rajesh Ghai -ThinkEquity

Do you get a sense of the magnitude? Early 2010 or you would see some signs of that coming on as 2010?

H.K. Desai

I think what we’re seeing is that it’s I think the system platform is helping us and I think we start shipping the 8 gig because of people are going with the new platform. Now, what the growth is going to be in the future in the September or December quarter, we don’t know. I think it’s too early to say it.

Rajesh Ghai -ThinkEquity

Talking of the Emulex Broadcom and given that Broadcom is now looking for alternatives, will you consider licensing your technology to an adaptor window going forward?

H.K. Desai

If they can give us a billion dollars, I probably can license my Fibre Channel. I’m talking billion not million.

Rajesh Ghai -ThinkEquity

As the FDOE comes on stream, how do you see the royalty stream kind of ramping up?

Simon Biddiscombe

I think it’s all going to take time, Ragesh. So we’ll see over time how that all plays out.

H.K. Desai

I think in the short term, I think with royalty probably will be flat for awhile.

Operator

We’ll go to Min Park - Goldman Sachs

Min Park - Goldman Sachs

With respect to your three strategic initiatives, could you tell us how you’re prioritizing your investments.

H.K. Desai

We’re not differentiating. All initiatives, R&D, and all the efforts we’re doing on FCoE for the last few years and will continue doing these things. We also make sure that we still continue the core business, which is Fibre Channel 8 gig or going forward the 16 gig. So we’re not really prioritizing. All these are very important product for us to continue growth in the future.

Min Park - Goldman Sachs

Your main competitors have been relatively vocal about its first mover advantage in next generation universal adaptors. So you can just give us a sense of you know you were first in the second generation CNAs. Can you tell us where you are on your next gen platform and to what extent does that predicate on Fibre Channel stack onto your NetXen acquisition?

H.K. Desai

So what we’re doing is we have a first generation product with a multiple silicon, now your second generation we call that a single chip…and we start shipping to the OEMs. We have some more design win coming up and we’ll start announcing that as the time goes.

So I think we are in pretty good shape. What we’re doing is also there are some customer like NetXen is a long design win and they want to put the Fibre Channel…we are porting those stacks on the NetXen silicon and we are working because some of the customers need that and then we’re also working on the next generation product. So we’re doing a lot of activities…

Min Park - Goldman Sachs

Do you know the timing of when you’ll be able to port your Fibre Channel stack on the NetXen silicon?

H.K. Desai

We don’t announce the timing on that.

Operator

And from Morgan Keegan, Harsh Kumar.

Harsh Kumar - Morgan Keegan

The time I think in two quarters I’ve heard you guys talk about signs of encouragement. I’m curious if it was broad based kind of signs of encouragement that you’re seeing here or one specific market. Any color?

Then also, second part that I question, if you back out NetXen and you back out some of the new revenue you’re getting from let’s say Fibre Channel or Ethernet product, would you still be looking for growth?

Simon Biddiscombe

The forms of the business as we look into the September quarter as we said or as H.K. alluded to earlier in the Q&A is that the host business and the network business are both expected to be flat up 3% and then the other silicon business and the royalty business will be roughly flat. So it’s fair to say that when we look at our product families, we’re expecting fairly consistent performance from the host and network businesses.

When we look at our OEM customers, which is another way to view what we’re seeing at this point in time. When you look back into the June quarter, the performance was actually fairly tight in terms of the OEM customers and the four biggest OEM customers were plus or minus a very tight range indeed. So we were encouraged by the fact that there weren’t significant swings from one customer to another customer. They all delivered fairly consistent performance. So those two factors in themselves are important indicators with stability.

As it relates to what we see looking forward from FCoE and NetXen, the contributions of those are still relatively limited as we said on the call three months ago. We expected the NetXen contribution to be less than a million dollars, $5 million dollars on a full year basis and that continues to be the case. So that’s not a significant driver for growth. Then when we look at it within the context of FCoE, the FCoE is less than a million dollars at this point in time.

Those two items in themselves are by no means the only drivers of growth in the business.

Harsh Kumar - Morgan Keegan

H.K., I think you talked about silicon business to be flattish. Is this sort of the level we should be think going forward?

H.K. Desai

I think it’s a very good question and if you look at the last couple of years, we went through a lot of transition in the silicon business. We announced a couple of years ago to getting out of the (?) business and the third transition is going from Fibre Channel drives, because that impacted the backend of our silicon business. So if you look at all of this behind us and what we’re seeing for this fiscal year is we see about flat business with the silicon for the next two or three quarters.

Harsh Kumar - Morgan Keegan

Since you are feeling better about your business, can I ask you about what you saw in terms of linearity so far, how the quarter shaped out?

Simon Biddiscombe

Last quarter, we saw what I would characterize as very traditional linearity, Harsh, so a good first month let’s say, because it’s the end of the quarter for three of the principle OEMs, that it levels off in the second month and then you have a good third month as we deal with the ends of the quarters for another three OEMs, right. So what we saw was what we’ve historically seen. Again, a good sign as it relates to stability. Then as we move through the first 21 days of July, things have continued on reasonable.

Harsh Kumar - Morgan Keegan

Simon, taxes, expect 28% of modeling purposes the rest of year?

Simon Biddiscombe

What we actually said was full year, 28%, because you’re got that 21% quarter. You actually need to put 30% in Q2, Q3, and Q4, and then you’ll end up with 28% on a full year basis.

Operator

There are no further questions at this time. Gentlemen, I’ll turn the conference back over to you for any closing or additional comments.

H.K. Desai

Thank you. That concludes our call for today. We look forward to updating you on our progress next quarter. Once again, thanks for your time, and good-bye.

Operator

Ladies and gentlemen, that does conclude today’s conference. We thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: QLogic Corp. F1Q10 (Qtr End 06/28/09) Earnings Call Transcript
This Transcript
All Transcripts